Magic trick to ensure steady returns from unsteady stocks

Dividend from stocks is tax-free in the hands of the investors to the extent of Rs 10 lakh a year.

Yes, Mr Market is unstable, but it is still possible to get stable returns from stock investment, and how!

After the superbly rewarding 2017, most analysts say calendar 2018 is unlikely to deliver big returns due to many headwinds in the form of political uncertainties, soaring crude oil prices and global trade issues, among others.

Equity benchmark Sensex is down over 3,000-odd points since January 29 till now. Some analysts are advising their clients to stick to largecaps while others are recommending a shift to defensives to survive a gyrating market.

Company Summary

NSE

BSE

Centrum

-0.45 (-0.71%)

Vedanta

-4.30 (-1.51%)

But market veterans say there are options that can deliver steady returns to equity investors even in an unsteady market; dividend yield stocks are known to be one.

“When you are not sure how long the stock correction will last, good dividend yield can en sure steady income and, therefore, you can afford to forget what the index or stock is quoting at. You treat the stock more like a fixed deposit, where you get fixed returns. Therefore, there is less tension,” Sharma said.

There is a set of stocks known for giving good dividend year after year. Dividend yields of stocks like Indiabulls Ventures, Coal India, Pfizer, Hindustan Zinc, Indiabulls Housing Finance and NMDC have been steady between 6.50 per cent and 17.97 per cent in last five financial years.

In terms of dividend per share (DPS), Coal India has given an average dividend of Rs 22.20 per share every year between FY13 and FY17; Pfizer and Indiabulls Housing Finance have given average dividend of Rs 88 and 29.40 per share every year during the same period.

The strategy suits conservative investors.

But there is a word of caution. “One should look at the financials of the company before picking a stock on the basis of dividend yield record alone. A healthy balance sheet can make sure the company will continue to pay dividend,” says Mayuresh Joshi, Fund Manager, Angel Broking.

Dividend from stocks is tax-free in the hands of the investors to the extent of Rs 10 lakh a year. It is unlikely that a small investor would receive a dividend of over Rs 10 lakh in a year.

If someone does manage to earn more than Rs 10 lakh, the dividend income would get taxed at 10 per cent, which is much less for people in the marginal tax bracket of 20-30 per cent. It is even less than short-term capital gains tax of 15 per cent and equals long-term capital gains tax of 10 per cent.

To make it clear, if you earn Rs 15 lakh as dividend income, the first Rs 10 lakh is exempted from income-tax and one would pay Rs 50,000 as tax on the remaining, i.e. 10 per cent of Rs 5 lakh.

“In the current state of the economy, where bank fixed deposits offer interest rates to the tune of 6-7 per cent, there are stocks giving dividend yields similar to that. Further, interest on bank fixed deposits is taxable, whereas dividend income from equity is completely exempt from tax (except when the dividend income in a financial year exceeds Rs 10 lakh). In that context, post-tax dividend yields of some stocks are way higher than post-tax interest yield on bank fixed deposits. So, investors can consider some of the high dividend yield stocks to ensure regular inflows,” CentrumNSE -0.40 % Broking said in a report.

In the BSE500 pack, stocks like Hindustan Zinc, SJVN, VedantaNSE -1.70 %, NLC India and Coal India were among top names in terms of dividend yield in FY17. (See table for top 20)

Analysts say PSUs have been high dividend payers, mainly with a view to helping the government make up for shortfall in tax collections and take care of its fiscal deficit.

Stocks like Coal India have been huge dividend payers over the years. Traditionally, maximum activity in terms of PSU dividend payout happens in the fourth quarter of a financial year.

The government received around Rs 8,044 crore as dividend from Coal India for FY18 as the miner’s board approved payment of interim dividend for the financial year at Rs 16.50 a share. The miner’s total payout on account of this would be to the tune Rs 10,242 crore.

The company distributed total dividend of Rs 12,352 crore in FY17 and Rs 17,306 crore in FY16, according to the data available with Ace Equity.

“PSU companies in which government holds majority of stakes would pay as much dividend as is possible so that the government can manage the fiscal deficit better,” said Sharma of HDFC Securities.